Fixed Income and volatility yields

On page 89 it says:

Usually, yields on high-quality corporate bonds are less volatile than on more-liquid Treasuries. Government bonds are used ina wide variety of hedging as well as speculativce trading strategies.

I don’t get this. Why and how are corporate bonds less volatile than more-liquid treasuries. I always thought governemnet notes would have the least volatility.

Thanks. Much appreciated.

You are confusing volatility of yields with credit risk.

Because corps trade less frequently than govvies there is more volatility. And when I say less frequently I mean a LOT less frequently, like dusty old bonds never trade so often market information isn’t reflected in the price. There are some good whitepapers on Google about liquidity dropping off a cliff on bonds after a few months or years of issue.

They still yield more than govvies and still have higher credit risk.

This is definitely not clear, of Corporate Bond does not trade as often as Govt Bond, then it must be more risky and thus should offer higher yield must have prices in Illiquidity premium into its value.

So I still can’t understand how Corporate bond is less volatile than Govt bond, I think it should be the other way around.

Yep sorry I meant as corps trade less frequently they will have lower yield vol than government bonds.

So yields are inversely related to price. Since price of corporate bonds don’t move as much as govt ones, due to less trading and hedging, we infer that yields also don’t change a lot. Hence volatility is of corporate yields is less than government yields.

Corps don’t trade much as buy-and-hold investors hold them for the long time; bonds are just not available for trading. Since they are not traded frequently, although they are less liquid than Treasuries they still have less price movement (volatility) than treasuries.

Similar concept is there in AI for real estates which have lower volatility because of infrequent transactions. (Smoothing bias)

Yes, but since it’s infrequently traded and is less liquid, wouldn’t you have higher volatility in them, similar to Alt Inv?

Liquidity is one factor. Another is the frequency of news. Treasuries are constantly moved by political and macroeconomic news, with risk averse fund managers (the Japanese, among others) moving money in and out.